Wuermeling: Brexit marks a turning point and an opportunity
For Bundesbank Executive Board member Joachim Wuermeling, Brexit marks a turning point that will weaken the City of London's role as Europe's financial centre. However, the EU could consequently go on to develop its own global financial centre:
"Information technology is opening up the possibility for financial centres in the rest of the EU
to become a networked digital city of Europe," Mr Wuermeling told an audience of around 130 at an event organised by Goethe University's SAFE Policy Center in Frankfurt am Main.
Reminding the audience of the British financial centre's importance, he remarked that,
"London has long been the main hub for Europe's financial system." He explained that the City benefits from what are known as economies of agglomeration, with the local concentration of financial agents such as banks, funds, private equity firms and insurers but also related service providers making for a wide range of financial products and high market liquidity. London's significance as a financial centre is also reflected in individual financial market segments, Mr Wuermeling noted. For instance, the United Kingdom, and London, in particular, host around 43% of euro trades on the foreign exchange market, which is more than twice as much as the share accounted for by the rest of the EU as a whole. He went on to report that, with total assets amounting to the equivalent of €9.3 trillion, the British banking system is also the largest in the EU, and highlighted its close ties with continental Europe.
It remains to be seen whether a free trade agreement will be reached
According to Mr Wuermeling, Brexit will radically transform this relationship. For starters, banks domiciled in the United Kingdom will lose access to the European single market, and continental European credit institutions will also no longer be able to provide their services in the United Kingdom without barriers. He explained that, while the British want to strike a free trade deal with the EU, it currently remains to be seen whether such an agreement will actually be reached.
Against this backdrop, Mr Wuermeling believes that financial institutions in London and the EU have a range of options open to them. These options, which include shifting business from the United Kingdom to the EU or discontinuing it entirely, as well as looking for business partners, ultimately all depend on institutions' individual cost-benefit analyses. He commented that, theoretically, Brexit could entail higher costs for financial agents, adding that there is not the slightest guarantee that the bulk of London's financial business will move to continental Europe after Brexit. Other financial centres could also be winners:
"New York, in particular, could well benefit from Brexit, as could other global financial hubs such as Singapore or Hong Kong," Mr Wuermeling continued, asserting that no other financial centre in continental Europe can fully replace the City of London owing to its size alone. Brexit could have a detrimental impact on the EU's major funding channels:
"From the point of view of financial market efficiency, financial market integration, financial stability, but also real economic development, a scenario such as this is clearly harmful," Mr Wuermeling remarked.
Networked financial centre – a digital city of Europe
With Brexit, Mr Wuermeling sees a new strategic challenge ahead:
"Initiatives are therefore needed if we are to strive for a globally significant financial market in continental Europe." Even after Brexit, the EU and, in particular, the euro area will still have what it takes, he added. However, he believes that Europe's overall potential is spread over various locations across the whole continent, with its financial centres frequently competing with each other for market shares, tax revenues and jobs. As a result, he fears that a new, continental European financial centre may not be able to reap the benefits of economies of agglomeration in the same way as the City of London. Mr Wuermeling considers new technologies to be the answer to this problem:
"Digitalisation could mean that geographical proximity may become less and less important." Various locations could band together and work together more efficiently.
"The European continent has an incredible opportunity to set up a technologically first-class, networked financial hub from scratch and to become a highly relevant global player", the Executive Board member said.
However, he noted that a number of prerequisites would have to be met before setting up a digital city of Europe. The locations would have to find a specialisation and cooperate online. For this, Mr Wuermeling identified the need to expand digital infrastructures and ensure that they are compatible. In spite of all efforts aimed at harmonisation, Mr Wuermeling concluded that the EU is still lacking a competitive legal framework, stressing that the aim of such a legal framework must be to ensure that there are no additional costs for cross-border transactions within the EU. He believes that it is also necessary to let market forces take effect. Policymakers could assume the role of a catalyst. Mr Wuermeling called the digital city of Europe
"a very ambitious project" with no guarantee for success. However, he underlined the need for European competition not to be seen as a zero-sum game where the win of one financial centre is a loss for another and he called on all financial centres to develop their potential together so that everyone may reap the benefits.
In the subsequent round of discussions, most questions were related to the idea of forming a digital city of Europe. Mr Wuermeling freely admitted that he did not know whether a new continental European financial centre would ever be born. But he remained adamant that it was high time to open debate on this issue. A number of hurdles that could potentially stand in the way of such a project were also voiced. Mr Wuermeling noted that individual transactions, such as those between a bank and a clearing house, are based on national, private law.
"While public law has been harmonised, in some cases private law still varies widely from country to country," the Bundesbank Executive Board member added.